Transforming Your HR Spend

Tim Padva April 2, 2012 — 2,431 views

Employees are a company’s greatest asset yet they are also a company’s greatest expense. From the first interview through on-boarding, payroll and benefits administration to retirement planning and termination, the employee lifecycle is fraught with costs and pitfalls. That’s why annual HR costs per employee continue to go up instead of down—despite the widespread adoption of HR technologies.

Inefficient management of the employee lifecycle is problematic for two reasons. First, it costs you time and money that you’d rather allocate elsewhere. Instead of getting bogged down by administrative duties, employees should focus on contributing to the company’s corporate strategy and bottom.

Second, you need to execute with excellence across the employee lifecycle. In today’s super-competitive markets, it’s more important than ever to hire and retain the right people—and to fully mitigate your exposure to legal and regulatory risks. So by optimizing the quality of your HR processes and policies, you also improve your bottom-line business performance.

As difficult as it may sound, it is actually quite possible to reduce HR burdens while optimizing the quality of delivery. This can be done by adopting five proven best practices:

1) Understand total current internal and external HR spending

2) Offload HR operations where appropriate

3) De-fragment management of the end-to-end employee lifecycle

4) Identify opportunities for getting more business value from HR processes

5) Continually modify HR processes to adapt to changing conditions

Companies that do these five things can, in fact, substantially lower their HR-related overhead while improving the quality of HR processes. As a result, they are far better equipped to grow and compete in a world where skilled, committed people continue to play a central role in the bottom-line performance of the business.

The employee lifecycle

To succeed in today’s challenging and highly competitive marketplace, your business needs skilled people who are committed to that success. People develop and design your products. They sell and support your customers. They figure out where you should spend your money and where you can save it. If you can’t recruit and retain quality people—and keep them highly motivated—your business will suffer.

The relationship between employees and employers is, however, a complex one. Your computers won’t go work for someone else if they are offered more money. Your company vehicles don’t have children who need medical care. And you don’t have to worry about your office furniture saying or doing anything that will land you in court for a sexual harassment suit.

In fact, your relationship with your employees extends across a lifecycle that is fraught with risks and opportunities. It is a complex relationship—and is likely to become even more complex as society and government regulations continue to evolve.

Who works for whom?

Because management of the employee lifecycle has become increasingly complex, HR costs continue to rise. According to PricewaterhouseCoopers LLC, mid-sized companies are spending almost $2000 per employee per year [1]. And that same study revealed that the real cost of HR operations such as payroll has increased by 6% since 2003—despite expectations that technology would drive costs down.

There are several reasons that businesses continue to have to spend more and more on HR:

Higher visible costs

As everything about HR has gotten more complex, costs have gone up. Once upon a time, all you had to do to advertise an open position was take out an ad in one or two publications. Now, you have to navigate the Internet—which yields a deluge of applications to review. Health plans and tax codes are more complex. Employee turnover is higher. And the technology you put in place to automate HR require substantial investment as well. This all drives visible higher.

Higher hidden costs

The PricewaterhouseCoopers study also uncovered a wider range of hidden HR costs. These include “indirect” labor costs—such as the time it takes to approve submitted timesheets and physically distribute of paychecks. Hidden costs also include the time that business and HR managers spend dealing with benefit plan decisions and employee questions, as well as the ongoing costs associated with technology maintenance and upgrades.

Process gaps

According to this same study, companies pay a substantial premium for taking a fragmented approach to their time and attendance, payroll, workforce administration and benefits administration processes. These various processes are obviously interdependent, so companies that rely on different systems and/or different vendors to manage them have to link them manually or via some “one-off” software integration. The cost of maintaining these linkages can amount to $200 per employee per year.

Incessant change

In addition to being more complex than ever, HR is also increasingly subject to change. The healthcare benefit landscape is particularly in flux—but so are the many federal, state, municipal and industry-specific regulatory mandates to which companies are subject today. This constant change forces business and HR managers to almost continually review emerging requirements and available solutions.

The continued escalation in HR costs means that your company’s resources are increasingly being consumed by overhead, rather than being invested in potentially more lucrative areas such as product development, marketing and customer care. More and more, you wind up working for your employees—instead of ensuring that your employees are working for you.

Risks and rewards

The complexity of the employee lifecycle doesn’t just drive up costs. It also increases the potential for errors and omissions. So the challenge facing HR today isn’t just to find ways to save money. It’s also to continuously improve processes and outcomes.

There are several reasons why you need to pursue HR excellence at the same time as you try to reduce HR costs:

Recruitment and retention of quality employees

The ability of your company to successfully compete in today’s fast-moving markets is largely contingent upon the quality of the people on your team. If your HR processes are weak, it is unlikely that you will be able to find, attract and retain the best possible candidates for every position at your company. If you achieve HR excellence, on the other hand, you will be able to hire and keep a better class of employee.

Motivation and development of employees

It’s not just the quality of the people at the time you hire them that matters. What you do with that raw potential over time also has a significant impact on your long-term business performance. If you mess up people’s paychecks, make it hard for them to get access to the benefits they need, don’t appropriately reward exceptional work and don’t quickly address workplace problems, your company’s performance will suffer. If, on the other hand, you do all these things right, your employees will be more productive, take more initiative, have better morale, and make a consistently better impression on your customers.

Mitigation of legal and regulatory risks

Complex processes and constantly changing regulatory requirements can put your company at risk. These risks can include fines, legal fees, negative publicity and erosion of brand value. If your processes are not highly accurate and compliant, your exposure to these risks increases. By optimizing the quality of your HR processes, on the other hand, you can substantially mitigate your exposure to these risks.

Continuous alignment of HR spend with business objectives

Every company needs to align its HR spending and processes with its specific business objectives. If you’re in an extremely price-sensitive market, you may need to whittle your spending down to the lowest amount you can reasonably achieve. If you’re in a high-end/high-margin market, you may be willing to spend whatever it takes to get and keep the best and brightest people available. But chances are you’re somewhere in between. There are areas where you might consider investing more to get more—and areas where you just want to minimize expenses. These priorities and objectives may also change over time as business conditions change. Quality HR processes enable you to align your HR spending with these shifting priorities, so you’re always getting maximum business value from every HR dollar.

The problem with rising HR costs, in other words, isn’t just that you’re spending more money. It’s that you may not be getting as much for your money as you could. They key to optimizing the return on your HR investments is therefore to both reduce costs wherever possible and improve the quality of HR processes across the entire complex employee lifecycle.

Five best practices for reducing burdens and optimizing quality

So what steps can you take to reduce your HR-related costs while optimizing the quality of your core HR processes?

Based on the real-world experiences of HR innovators and studies conducted by research organizations such as PricewaterhouseCoopers and Towers Watson, five specific best practices have emerged for both controlling HR spend and getting more value from it.

Best practice #1: Understand your total current internal and external HR spending

Before making any changes in your HR environment, it’s a good idea to fully inventory all the spending you’re doing now. This will help you make a more accurate comparison between what you’re currently spending and what various outsourced alternatives will cost you. As noted earlier, it’s important to factor in “hidden” costs—such as answering employee’s questions about various benefit plans—into your calculations.

Of course, you don’t want to subject yourself to “paralysis by analysis” either. So your cost inventory doesn’t have to be overly granular. The key issue in this best practice is to get out of denial about how much time and effort your company is really allocating to all phases of the employee lifecycle—as well as the real value you’re getting out of that entire investment.

Best practice #2: Offload HR operations where appropriate

According to PricewaterhouseCoopers, companies that outsource HR functions spend 18% less than those that perform the same functions in-house. This is obviously in large part because of the advantages outsourcers have in terms of specialization and economies of scale. The Towers Watson study also indicated that companies using HR service providers were twice as likely to report that they found it easy to deal with changes related to healthcare reform legislation.[1]

It is important to differentiate functional outsourcing from wholesale staff sourcing (where your employees become employees of your HR vendor) and software-as-a-service (which only moves your HR systems to the cloud). The former typically results in a surrender of control that can undermine your ability to utilize HR processes and policies for strategic advantage. The latter just reduces IT costs—but does not produce additional cost savings or value gains. So the best route is to retain control while offloading both IT and lifecycle management burdens.

Best practice #3: De-fragment management of the end-to-end employee lifecycle

While companies that outsource save an average of 18% on HR costs, companies that outsource their multiple HR functions to a single vendor achieve even greater savings—an average of 32% according to PricewaterhouseCoopers. These savings accrue because a single, seamless HR environment eliminates the costs associated with manual and/or software-based links between disparate HR systems.

A unified approach to the HR lifecycle also improves process quality through the use of a consistent data model, inter-process workflow rules, and end-to-end visibility into lifecycle operations. These characteristics make it much easier to define and implement policies, troubleshoot problems, and adapt to changing business requirements.

Best practice #4: Identify opportunities for getting more business value from HR processes

If all you do is automate your HR processes as they exist now, you may save some money—but you won’t gain any additional value from those processes. That’s why it’s important to find places where HR can do more for your employees and your business.

One good example of this is the implementation of self-service decision support tools for open enrollment. These tools reduce costs by enabling employees to answer their own questions about which plan is right for them. But they also increase employee satisfaction, since they provide those answers in real time and give employees a greater sense of control over their coverage. And these tools can also aid in recruitment and retention, since they make your company look much more employee-friendly than competitors who lack comparable self-service empowerment.

In today’s fast-changing world, no company can afford to remain complacent when it comes to HR. You have to be ready to respond to new recruitment opportunities, new regulatory mandates, changes in the labor market, and fluctuations in the economy. You also have to keep abreast of emerging HR best practices—because you don’t want to fall behind the competition.

This requires highly adaptable access to technology capabilities—as well as the ability to quickly and cost-efficiently re-configure existing systems to support new policies and business rules. It also means that you’ll need reliable sources of information about changes that might affect the way you’re doing HR. Thinking of either a technology implementation or a partner engagement as a one-time event probably isn’t wise at time when HR is so obviously in a state of flux. So it’s essential to build flexibility into your HR strategy and HR systems environment.

You can achieve both cost reductions and quality improvements by adopting any one of the above best practices. But if you can embrace all five—even if you do so sequentially—you can substantially increase your returns on your HR spend and transform HR from a cost center into a truly sustainable competitive advantage.

The business case for smarter HR

Business managers currently face challenges on many fronts—including sales, marketing, finance, globalization and product/service differentiation. So, while improvement of HR cost/benefit ratios may make sense on paper, the real question for company decision-makers is why they should make optimization of HR processes a priority today.

The answer is that the benefits companies realize from improving HR processes are exactly those for which they currently have the most dire need. These benefits include:

Profitability

When you spend less on overhead, your operating margins increase. These savings multiply as your business grows. With so many other costs rising, it’s essential to reduce those that can actually be reduced. Improved HR also improves top-line business performance by making sure you attract, retain and motivate the best people possible. This further boosts your company’s profitability.

Stronger competitive differentiation

When you spend too much money on HR, you’re not spending it on other areas of your business where you really need it to delight your customers and beat your competition. And, here too, the skills and morale of your employees make a big difference. If your people are smarter and happier than those of your competitors—and if they work harder for you—you will consistently win, even in challenging times.

Reduced risk

Inadequate HR processes leave you and your company exposed to all kinds of legal and regulatory risks—including accusations of race and gender discrimination, workplace harassment issues, and inadequate compliance training. By enhancing the quality of your HR processes, you substantially mitigate your exposure to these risks—which can potentially be very damaging to your near- and long-term business performance.

Stronger brand value

In today’s hyper-connected, socially networked world, word spreads quickly. So if your employees are unhappy, your customers and potential customers are bound to find out. On the other hand, if you gain a reputation as a great company to work for, your company’s public image will benefit. HR can thus directly impact one of your most precious company assets—your brand equity—in a highly positive way.

Greater business agility

Because markets have become so dynamic, companies have to be nimble to survive. HR plays a central role in achieving business agility. It is what enables you to scale your staff up and down with greater flexibility. It is how you on-board the skills and experience you need, when you need them. It is instrumental for responding to regulatory change. It can even play a crucial role in enabling you to acquire and rapidly assimilate other businesses.

It is also worthwhile to note that the positive transformation of your HR processes can be less disruptive and time-consuming than you think. With the right partner, you can smoothly and safely implement the best practices described here. So you can achieve a lot of business gain without a lot of business pain.

When you start viewing HR as strategic and not tactical, your company can better optimize its investment. Every company that wants to not only survive but thrive in today’s rapidly changing marketplace must learn how to transform their HR spend into a strategic corporate investment.